How to save money incorporating a business (and pay dearly in the future)

How to save money incorporating a business (and pay dearly in the future)

Doron Afik, Esq.
January 4, 2017

The phrase "I do not have enough money to buy cheap" is true in many cases, but certainly when establishing a company or a business enterprise. Many are "saving" money on a lawyer (whether by making the crucial step of setting up a business without an attorney or by making it with an attorney who is not knowledgeable in corporations or an attorney who knows the corporate field, but lacks experience in representation in Court in shareholders disputes) and find later that they are forced to pay dearly for this “saving.”.  In the better case the parties finance their  litigation lawyers and in the worst case they reach a business decision that it is not worthwhile to "invest" in litigation.

Establishing an Israeli company is these days a very easy process. Almost any young lawyer knows how to have the client sign the pile of standard documents required for the incorporation of the company, documents that may even be found over the internet - a basic set of document that sometimes seem an inconsequential procedural matter. The businessmen are more interested in the business side and thus not necessarily want to "invest" in agreements customized to their needs or use the services of an attorney who is familiar with not only the side of the establishment of the company but also with personal experience in the establishment and management of a commercial business as well as with practical experience in representing in Court in cases involving shareholders disputes – an attorney who may prepare for them articles of associations and shareholders agreement, each of which may assist them in coping with corporate crises or shareholders disagreements, some of which are unpredictable at the time of incorporation.

Often it turns out after the commencement of the business activity that there are gaps in the understanding of the business or that future extrinsic events require reference to the articles of association, such as the bankruptcy of one of the shareholders or even a business opportunity that requires funding but the parties are not able to make a decision due to the absence of procedures in the Articles of Association of the company or the shareholders' agreement. At this stage the parties discover that the financial “saving” upon the incorporation of the business and their choice not to “invest” in full corporate documents, would now cost much more. The company was established without a lawyer or with a lawyer of no experience in the field and neither the shareholders agreement (if such exist) nor the articles of incorporation entertain such issues. Often at his stage material disagreements already exist and the issues become a real dispute that puts the company’s activity in real jeopardy.  The litigation lawyers may very well be the only ones to benefit from the company at this stage.

The success of a company depends, among other things, on the ability to make decisions and manage it. Therefore it is vital that the articles of association of the Company and the shareholders agreement will be tailored fit to the dimensions of the parties and goals of the company and that the “fitting” will be made by an attorney with not only the correct business view but also experience in shareholders disputes, so that the attorney may include in the documents the proper arrangements.  While this is an investment at a stage where the company is yet to generate revenues, but like any structure, without a solid foundation the structure may at some point collapse.  We note, that if a company need be incorporated in a haste in order to immediately commence in the business, one may set up a company with the standard documents, but it is important to promptly sit with an attorney knowledgeable in the field in order to tailor make the proper articles of association and even a shareholders agreement to replace the standard documents as soon as practical.